Difference between European calls and American calls exercise, american, difference, question, otherwise

parott

I am taking a Schwesser sample exam, and this question came up:

The difference between the Euro 40 calls and otherwise identical American 40 calls is:

the answer is: 0

explanation:

early exercise is not valuable on non dividend paying stocks, so the value of the american is the same as the european.

Can someone please help me out, what are some of the differences between European and American options?

Thanks in advance

Newhuman

> There are only a few circumstances where exercising a call early is of value - the main one
> being right before a dividend is issued that would cause a drop in value large enough to entice
> early exercise.

In practice this is not even true. Market forces and supply demand actually adjusts to any pending dividends. For CFA exam, ignore reality.

b_sea93

thanks for the help

hassan

There are logistical differences, ie: American options usually on exchanges whereas European options are usually OTC and the monthly expiration dates. But, for CFA the only relevant difference is the main one - the value of having the ability to exercise early. There are only a few circumstances where exercising a call early is of value - the main one being right before a dividend is issued that would cause a drop in value large enough to entice early exercise.

The other situations where early exercise is valuable are very specific and limited - involving specific types of options on specific assets, so, they aren't really relevant.

Bottom Line: The only real reason to exercise a call option early as opposed to just selling it is if a dividend issue is coming up where the dividend value is greater than whatever time value is left.